How do credit scores work in Australia, the USA and a range of other countries around the world?
Your credit score is one of the most important pieces of information lenders use when deciding whether to lend you money. This powerful number takes into account your financial history and helps determine your borrowing power, so it’s vital you take steps to ensure that your credit score is as high as possible.
But do you know what factors are taken into account when calculating credit scores, not only in Australia but in other countries around the world? Let’s take a closer look at how different countries score credit to get a better understanding of credit reporting as a whole.
When you apply for a home loan or another form of financing in Australia, the lender will check your credit score and request a copy of your credit report from a credit reporting agency. There are four credit reporting agencies, Equifax (formerly Veda), Dun and Bradstreet, Experian and the Tasmanian Collection Service, that collect your financial information and collate it into a credit report. Some of those bureaus also use the data they collect to create your credit score.
However, as each credit reporting agency collects financial information differently, each one has its own system for determining your credit score. For example, Equifax uses the Equifax Score system to rate all credit-active individuals with a score out of 1,200 (a score of 833 or above is considered excellent), while Experian uses your financial data to calculate a credit score out of 1,000.
The data used to calculate your credit score can also differ slightly between agencies but will include the following details:
- The age of your credit file
- The type and amount of credit you have applied for in the past
- Any negative credit listings
- Court writs or default judgments
- Your repayment history on credit accounts
- What accounts you have opened and closed
Up until March 2014, credit reporting in Australia only used negative reporting. However, the introduction of positive or comprehensive credit reporting means lenders can now make a more balanced assessment of your borrowing history by accessing information about your current accounts and your history of making on-time repayments.
You can check your credit score by requesting this information from one of Australia’s credit reporting agencies. Depending on the agency, this may be free or may attract a fee. You can also check your credit score for free with finder.com.au.
There are three national credit bureaus that handle credit reporting in the USA: Experian, Equifax and TransUnion. The country’s comprehensive credit reporting system ensures that your positive and negative financial history is included, with on-time payments reported alongside judgments and bankruptcies.
The agencies use this data to create your FICO score, which was introduced in 1989 by the Fair Isaac Corporation. The score is calculated based on the following components:
- Payment history. This makes up 35% of your score and examines whether you have made your past credit payments on time.
- Amount owed. This makes up 30% of your score and includes your credit card debt to limit ratio, number of credit cards and amount owed.
- Length of credit history. This makes up 15% of your score. A longer credit history will generally result in a higher FICO Score.
- New credit. This makes up 10% of your score and examines how many times you have applied for new credit.
- Credit mix. The makes up 10% of your score and takes into account your mix of credit cards, retail accounts, mortgages and other loans.
The vast majority of banks and credit providers use the FICO system to generate a score between 300 and 850. Anything above 720 is considered to be an excellent score. In April 2016, the average national credit score in the USA reached 699, an all-time record.
The three credit reporting agencies collect information differently, so FICO scores can vary depending on which bureau provides the information used to calculate the score.
Just like the USA, the UK has three main credit reporting agencies: Callcredit, Equifax and Experian. They also collect financial data in line with a comprehensive credit reporting system, ensuring that positive borrowing information, such as making repayments on time and in full, is included alongside any black marks.
However, each agency uses its own scoring system to develop your credit score:
- Experian. The Experian Credit Score runs from 0-999, with anything above 881 considered good and 961 or above excellent.
- Equifax. Equifax scores range from 0-710, with scores of 467 and above classed as excellent.
- Callcredit. Callcredit generates a credit rating of between 1 and 5 for potential borrowers, with 1 being the lowest and 5 the highest.
With this in mind, your borrowing power in the UK varies depending on the reporting agency and also on each individual credit provider’s lending criteria.
Canada has two main credit reporting agencies that collect and assess your financial information: Equifax of Canada Inc. and TransUnion Canada. Canadian credit reports contain information about every loan you’ve taken out in the past six years, including how much you owe, whether you make your repayments on time, and the credit limit on each account.
Credit scores in Canada range from 300 up to 900. The formula the credit reporting bureaus use to calculate your score is secret, but 27% of the population has a score between 750 and 799.
According to TransUnion, 650 is an important credit score to keep in mind. Score less than this and you may have trouble having credit applications approved, but score more and you should be able to qualify for a standard loan.
In China, there’s currently a public registry that was originally created by the People’s Bank of China. However, since a significant portion of the population doesn’t have a traditional credit history, the Chinese government has plans to take the concept of credit scoring a few steps further.
Plans are currently underway to build an all-encompassing social credit system that rates each citizen’s trustworthiness in all aspects of life. This will combine a person’s financial information with their social, legal and political history to create a single number that ranks each person.
The scheme isn’t expected to be implemented until 2020, but the government is currently assessing eight social credit score programs being developed by Chinese companies as part of state-approved pilot projects.
India’s credit reporting system is still under development. The government of India and the Reserve Bank of India created the Credit Bureau Information India (CIBIL) in 2000 to collect records of each individual’s loan and credit card payments. It has since partnered with TransUnion and collates information on home loans, car loans, personal loans and credit cards to generate a score between 300 and 900.
The CIBIL takes into account positive information when calculating your score, including a month-by-month record of your loan payments for up to three years. The agency reports that 79% of approved loans go to people with a CIBIL TransUnion score of 750 or more.